By Steven D. Cole, J.D.
A consumer adequately alleged a conspiracy to lure customers into paying only shipping costs for a skin care product "free trial," then charge customers full price and enlist them in monthly subscriptions.
A consumer successfully alleged Racketeer Influenced and Corrupt Organizations (RICO) Act and state law claims over an alleged false advertising beauty product scam. The complaint alleged that customers were tricked into providing their credit card numbers to pay shipping costs for a "free trial" of a skin care product, but were then charged full price and enlisted in monthly subscriptions. The plaintiff’s Consumer Legal Remedies Act (CLRA), the False Advertising Law (FAL), and the Unfair Competition Law (UCL) claims went forward, based on allegations that, among other activities, the defendants created advertisements containing false statements about the price, created and operated landing pages viewed by consumers as well as "false front" Web sites containing full disclosures which were shown to investigating financial institutions; and opened hundreds of merchant accounts and spread charges to different consumers across these accounts through the use of load balancing software in order to avoid detection by financial institutions. Her RICO claim also went forward, based on allegations that the defendants’ coordinated activities were necessary to successfully complete the fraudulent consumer transactions and to avoid detection from financial institutions (Tan v. Quick Box, LLC, April 7, 2021, Huff, M.).
Facts alleged. According to the complaint, the defendants advertised skin care products as available for a "free trial" with just a $4.94 shipping charge, then subsequently billed customers for the full price of the product (roughly $85 to $90) and automatically enrolled them in monthly subscriptions. The defendants frustrated customers’ attempts to return the products or receive a refund by operating "false front" Web sites to mislead banks and credit card companies investigating chargebacks. The plaintiff is one such consumer, seeking certification of a nationwide class. The defendants are numerous, divided into three groups: cosmetics companies selling the La Pura skin care products (La Pura Defendants); a fulfillment company providing generic products to the La Pura Defendants and assisting them with marketing, advertising, and returns (Quick Box Defendants); and a customer relationship management software company providing specialized load balancing software to enable the use of multiple merchant accounts (Konnektive Defendants).
Alter ego liability. The consumer sufficiently alleged alter ego liability for the La Pura Defendants, claiming that they were shell companies which commingled assets and resources without regard for corporate formalities, and were run as a single enterprise. The consumer also adequately alleged alter ego lability for the Konnektive Defendants.
CLRA, FAL, and UCL claims. The CLRA, FAL, and UCL claims went forward. As to the La Pura Defendants, the consumer adequately alleged that they created advertisements containing false statements about the price, endorsements, limited supply, effectiveness, and free-trial nature of the La Pura products; created landing pages viewed by consumers as well as "false front" Web sites containing full disclosures which were shown to investigating financial institutions; and opened hundreds of merchant accounts and spread charges to different consumers through the use of load balancing software in order to avoid detection by financial institutions.
As to the Quick Box Defendants, the consumer adequately alleged that they managed returns, handled customer complaints, and processed refunds and chargebacks for the La Pura products; helped compose misleading and deceptive advertising on the La Pura Web sites; provided software integration and other Web-related services; possessed extensive knowledge of "free trial" scams from past experience; and used its expertise to advise the La Pura Defendants on how to run the scam. These factual allegations demonstrated that the Quick Box Defendants possessed knowledge and provided substantial assistance, rendering them liable under an aiding and abetting theory of liability under the CLRA, FAL, and UCL. The court disagreed with the Quick Box Defendants’ intimation that, at most, they merely failed to take action to stop the La Pura Defendants’ alleged scam.
As to the Konnektive Defendants, the consumer stated plausible claims for relief under the CLRA, FAL, and UCL under an aiding and abetting theory of liability. Knowledge and substantial assistance were sufficiently alleged by the following factual allegations: the Konnektive Defendants designed, implemented, and utilized the load balancing software to be used for rotating merchant accounts to avoid detection of a scheme to defraud consumers; they licensed, provided access to, and helped operate the software functionality; they processed bank and credit card transactions; they advised the La Pura Defendants on how to use the software; and they counseled the La Pura Defendants on how to apply for, manage, and use multiple merchant accounts. In response to the Konnektive Defendants’ claim that the allegations permitted the inference that the commercial software was designed and used only for lawful purposes, the court credited the consumer’s response that there could be no legitimate reason to be rotating hundreds of merchant accounts and employing chargeback caps if not for the perpetuation of the alleged scam.
RICO claim. The consumer sufficiently alleged a RICO claim against defendants. The consumer proffered sufficient factual allegations to show that the defendants formed an associated-in-fact enterprise which conducted multiple, related, predicate acts of mail fraud, wire fraud, and bank fraud over a period of several years, and that the common purpose of this enterprise was to defraud customers of La Pura products. The consumer alleged that the defendants’ coordinated activities were necessary to successfully complete the fraudulent consumer transactions and to avoid detection from financial institutions. In addition, there could be no legitimate reason to have front people apply for merchant accounts, to use multiple merchant accounts and shell companies to sell the same or similar products, to operate two versions of a Web site (one with the terms and conditions disclosed, and one without), and to use load balancing software in a manner evincing an intent to avoid fraud detection by credit card companies. Evidence of predicate acts of racketeering behavior, the defendants’ apparent control over the enterprise, and proof of causation all necessitated the court’s ruling that the RICO claim survived summary judgment.
Other issues. The consumer’s non-California state consumer law claims failed for lack of standing, as she is a resident of California and was injured there.
This case is No. 3:20-cv-01082-H-DEB.
Attorneys: Kevin Michael Kneupper (Kneupper & Covey PC) for LeAnne Tan. Damon W.D. Wright (Gordon & Rees, LLP) for Quick Box, LLC.
Companies: Quick Box, LLC
MainStory: TopStory Advertising RICO CaliforniaNews GCNNews
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